Sunday, June 27, 2010

Software Industry Gains in Second Quarter 2010

I follow three software companies that reported quarter results last week: Adobe (ADBE), Red Hat (RHT), and Oracle (ORCL). All of them showed sequential and year/year increases in revenues and profits. While there may be exceptions, it is fair to conclude that businesses are back to upgrading or even buying new software now that the worst of the business panic of 2009 is behind us. [I don't currently own any of these three companies, but I have owned Red Hat in the past and I do some freelance work for a competitor, Microsoft.]

Red Hat, the open source provider of enterprise ready Linux and JBoss middleware, had revenues $209.1 million for the fiscal quarter ending May 31, 2010. That is up 7% sequentially and 20% y/y. For details see my Red Hat Q1 fiscal 2011 Analyst Conference Summary or

Adobe is known for its content creation programs like Acrobat, now mostly wrapped up in its Creative Suite. Its revenues for the quarter ending June 4, 2010 were $943.0 million, up 10% sequentially and up 34% year/year. For details see my Adobe Q2 Fiscal 2010 Analyst Conference Summary or

Oracle, the enterprise database and data resource management company had revenues of $9.51 billion in its fourth fiscal quarter 2010 ending May 31. That is up 49% sequentially and up 39% from year-earlier. However, some of that increase is from the acquisition of Sun, which is largely a hardware company. So Oracle is no longer a pure software play, but is more like IBM. For details see my Oracle Q4 Fiscal 2010 Analyst Conference Summary or

Red Hat is probably taking market share from Microsoft, but the market is expanding so fast this should have little effect on Microsoft revenues. Oracle execs claimed to be taking market share from IBM and SAP. Much of Oracle's gain came from the release of Creative Suite 5 during the quarter. Many companies skipped Creative Suite 4, which came out during the recession. A lot has changed in content creation in the last four years, so version 5 will probably be seen as a necessity by most designers.

All of these companies are trading for spectacularly low P/E ratios compared to past technology bull markets. Investors are skeptical after being burned by technology stocks in 2001 and then by almost everything in 2008. I would say the best way to restore confidence is to give profits back to investors in the form of dividends. Every one of these companies could pay an attractive dividend and still earn plenty of cash for operations.

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